BUDAPEST: Hungary’s central bank left its benchmark interest rate on hold at a record low 2.1 percent yesterday in line with its guidance announced last month, when it ended its two-year easing cycle.
The central bank, which had steadily cut borrowing costs from a seven percent peak in 2012, now aims to keep rates at a record low for a long period to help economic growth.
At an annual rate of 3.9 percent in the second quarter, Hungary outperformed other economies in central eastern Europe.
However, conflict in neighbouring Ukraine and expectations for earlier monetary tightening in the United States could disrupt the Hungarian bank’s plans, and it may have to raise rates earlier, possibly late this year, some analysts said.
In an August 19-21 Reuters poll, 15 out of 16 analysts said that the bank would hold fire yesterday. Only Danske Bank forecast that it would cut rates, by 10 basis points.
Most analysts in the poll also projected a flat base rate through December. But some saw a risk that rates would start to rise late this year. The median projection was for the base rate to rise to 2.9 percent by the end of next year.
Investors will examine the bank’s statement closely for guidance on how long its base rate might remain on hold. The statement was due on Tuesday at 1300 GMT.
After its July rate cut, the bank said the macroeconomic outlook “pointed in the direction of persistently loose monetary conditions.” Governor Gyorgy Matolcsy said the bank would keep rates unchanged until the end of next year unless inflation jumps.
“The external environment has been volatile in the past weeks so the question arises whether the central bank could be forced to raise interest rates earlier,” analysts at brokerage Buda-Cash said in a note.
Nervousness over the Ukraine-Russia conflict has boosted the forint’s volatility since July, and in early August the currency slipped to its weakest against the euro since early 2012 at 317.30. It has regained some ground since then.
However, a law passed in June that is expected to cause losses of up to 900 billion forints (3.8 billion US dollar) for Hungary’s banks may weigh on the currency in the rest of the year, analysts said.
But some said the central bank’s Monetary Council was likely to tolerate further forint weakness.
“We believe the positive growth surprise (in Q2) should not impact the (Monetary Council’s) stance of keeping monetary conditions loose and tolerating further FX weakness amid slowing export growth and a narrowing trade surplus as domestic demand picks up,” Citigroup analyst Eszter Gargyan said in a note earlier this month.
The government also plans to convert foreign-currency loans into forints by the end of 2014, which could increase market risks.
Reuters
